Call for trailing commission rule change to spur M&A

Financial planners are urging the incoming Abbott government to change the trailing commission rules to enable merger and acquisition activity in the sector to resume, arguing that a key aspect of the advice reform process has been left in limbo by the federal election.

The current arrangements for trailing commissions are preventing advisers from switching firms or selling their business to a different licensee.

Since the regulations about the payment of commissions were finalised on June 28,
Paul Tynan
, chief executive of Connect Financial, a financial services broking firm, has not completed a single transaction in the advice sector.

“There has been a hold on M&A purely because of [the Future of Financial Advice reforms]," he said, referring to an overhaul of the advice industry instigated by the outgoing Labor government. The regulations unveiled in June were part of a sweeping reform process designed to improve the quality of advice in Australia and encourage more consumers to seek help about the management of their retirement savings.

“The grandfathering arrangements are causing some dysfunction in the industry among advisers in the process of moving. This is a distortion that should be removed as soon as possible," said
Phil Anderson
, chief operating officer of the Association of Financial Advisers (AFA).

Resolution of the issue on hold

Mr Anderson said finding a solution to the grandfathering problem had been delayed because of the federal election. “With the calling of the election a resolution of the issue has been on hold. We would hope that we could get this fixed pretty quickly but it may take a little bit of time," he said.

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The inability to switch licensees could be damaging to clients, potentially denying them access to better and cheaper products and services, as well as to advice businesses. The regulations could affect the ability of advisers in their 50s and 60s to retire by limiting the potential range of buyers for their business, Mr Anderson said.

Under the Future of Financial Advice reforms, introduced on July 1, planners are required to act in the best interest of clients, trail commissions on investment and super products for new clients are banned, and planners must sign fresh contracts with clients every two years.

Frozen market place

The industry had been working on the basis that all trailing commissions in place before July 1 would be retained.

The updated regulations mean that if advisers switch licensees, they risk having to move all their clients to new administration arrangements, which could trigger exit fees, capital gains taxes and the loss of insurance benefits, Mr Anderson said.

The AFA said it would raise the issue in coming meetings with the new financial services minister, who is yet to be named.

“This is the most pressing issue at the moment: we have got a market place that is frozen," said AFA chief
Brad Fox
.

The Coalition has pledged to change a number of the FoFA reforms, which the industry hopes it will be able to complete quickly by changing the regulations before potentially introducing legislation to make the changes permanent.